A sixth Pennsylvania online gaming bill recently emerged. It is SB 900. The bill is sponsored by Senator Kim Ward. The co-sponsors are Senator Robert Tomlinson, Senator Elder Vogel, and Senator Joseph Scarnati.

SB 900 covers both land-based and online gaming. The land-based agenda includes alcohol sales, changes to policies at resort casinos, and allowing an expansion of smaller satellite casinos owned by existing licensees, while the online side authorizes both poker and casino play.

Senator Ward indicated at a hearing for SB 900 this week that amendments to the bill have already been submitted, suggesting that all involved appreciate SB 900 as a starting point and not a final product.

With that said, there are many issues with how the first iteration of SB 900 approaches online regulation.

Tax rate will harm product and revenue potential

The most glaring one is a proposed 54 percent tax rate on interactive gaming revenue. This level will make it impossible for any Pennsylvania site to operate profitably.

The proposed 54 percent tax rate is identical to what is paid on slots at land-based casinos in Pennsylvania. The tax rate for table games is 16 percent.

The tax rate for online poker in Nevada is 6.75 percent. This is the same rate that land-based Nevada gaming revenue is taxed. New Jersey interactive gaming operators pay a 17.5 percent tax rate when including the 2.5 percent that goes towards the Casino Reinvestment Development Authority.

Impact of taxes on the consumer product

There are two notable differences between online poker in Nevada and New Jersey. Both appear to be in direct correlation to the different tax rates.

The cash game rake at both Nevada online poker sites is 5 percent of the pot. It is 5.5 percent in New Jersey. The rake cap is also higher at New Jersey games when compared to Nevada, depending on the limit. Borgata and Party Poker rake up to $5 per hand at its highest limit games.

The VIP program at WSOP.com is different between Nevada and New Jersey. The Nevada loyalty program is more lucrative even though WSOP.com controls 99 percent of the market.

In New Jersey, WSOP.com’s competitor is about its same size, yet WSOP.com offers lower rakeback on a percentage basis at most tiers than it does at its Nevada site that holds a virtual monopoly.

Players earn about twice the rakeback in Nevada than they would in New Jersey at any of the monthly VIP tiers. The higher rake and lower VIP returns appear to be taxes being passed directly to a customer.

There are examples of how tax rates negatively affected the online poker market in regulated European countries. These high tax rates have caused serious players to move to other countries or play on unregulated sites. Sites in these markets struggle to profit from operations.

The oppressive 54 percent tax rate could also hurt casino games. Pennsylvania online casinos could be inclined to spread poor slot returns, video poker pay tables, and table game rules. Player retention rates would suffer in that scenario.

Initial licensing fee a potentially insurmountable hurdle

In addition to the tax rate, the proposed $10 million permit fee could deter competition.

This license would be valid for five years. At a 54 percent tax, an operator would need to generate $3.7 million in annual gross gaming revenue to cover the $2 million per year licensing fee before taking into consideration the overhead involved in day-to-day operations.

This is an obstacle that may be impossible to overcome in a market of Pennsylvania’s size.

Limited licenses constrain the market

The bill would only allow one license per casino. This appears to mean that only one brand could be used.

That would prevent branding partnerships like the one between PartyPoker and Borgata in New Jersey. It could also force Caesars to choose between WSOP and Harrah’s. Both of these names have distinct audiences, one of which could be lost.

This policy would hurt the industry’s marketing efforts and further depress the revenue potential – and therefore the tax potential – of regulated online gambling.

In-person account creation could undermine poker liquidity

Another problem with SB 900 is that it would require players to sign up in person if they live within 20 miles of a casino.

Some obvious impacts arise:

If a local casino does not offer online poker, as is the case at a majority of New Jersey sites, this would make it inconvenient for players looking to create an account at a Pennsylvania site that does.

This would discourage competition between sites as it would not be convenient for players to shop around, especially those within 20 miles of a single Pennsylvania casino.

There are also individuals that lack transportation, stay at home with young or ill family members, are disabled, or have other reasons for not wanting to visit a casino. Requiring accounts to be created in person will have a negative effect on many of the potential players that online poker appeals to the most: those that do not or cannot frequent land-based casinos.

The lines to create a new account, especially at the time of launch, could also be a reason players stay away. A few negative social media reports over how long it took to create an account could hamper early growth of the industry. If the online gaming industry does not have a successful launch, it could prevent it from growing, especially the online poker side that requires liquidity to survive.

There are several alternatives to requiring a patron to create an account at a casino. The player identification systems used in Delaware, Nevada, and New Jersey are proven to be effective. Taking additional steps through phone or remote video verification are additional steps that could satisfy lawmakers concerned about fraud and underage players.

Category 3 exclusion may dilute support

Leaving so-called “Category 3” resorts out of the Pennsylvania online gaming industry presents another problem. These are resorts that offer casinos that are generally only open to guests and members.

One problem is that Valley Forge is a Category 3 licensee. It partnered with bwin.party, the operator of one of the two online poker networks in New Jersey, according to several media reports.

Another: attempting to exclude some operators from online participation could weaken the broad base of consensus that has emerged among land-based operators in Pennsylvania on the issue of regulated online gambling. A lack of consensus has ground California’s online poker process to a halt, and Pennsylvania stakeholders would be well-served to digest that lesson.

At least the discussion is open

It is a great sign that the Pennsylvania Senate is willing to discuss online gaming.

The issues mentioned in this column can be fixed through consulting with experienced online operators in other states and countries.

But if any material amount of the above left in the final language of SB 900, it could lead to a defeat of the bill through lack of support by interested parties that prefer to gamble on a better bill emerging in the Pennsylvania Legislature.

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John Mehaffey -
John is a writer for multiple online poker publications and is the author of the popular Online Poker Payment Processing Report. Read more from John by following @John_Mehaffey on Twitter.